Our Current Economic Crisis

I have been reading, studying, and thinking alot about the economy lately. My daughter is having to read a book entitled Whatever Happened to Penny Candy? for her high school economics course and the wife and I have been reading it also. Like all economics books, it is not perfect. But, especially the first several chapters are very good, and should be required reading for every single person in America (that is if I were the dictator type - but I guess the fairness doctrine would insist that everyone also read Keynes or Marx or something).

I have also been re-skimming Honest Money by Dr. Gary North, and What Has the Government Done to Our Money by the late Professor Murray Rothbard. If you get a chance, you need to read any or all of these.

Yesterday while out and about, I stumbled on a radio program which featured a guest named Thomas Woods. His insight into the situation was fascinating. A brief article about his book can be found here: http://www.pointofview.net/site/News2?page=NewsArticle&id=8531

Woods main argument, one that is echoed in the works of Rothbard and others, is that an unfettered free market is NOT the cause of the problems we are facing, and government intervention of one form or the other is NOT the solution. In fact, the exact inverse is true.

The current situation, like that of the Great Depression of the 1930s, has been caused by irresponsible governmental monetary policy.

The books mentioned above make this claim as well. In reading my version of Penny Candy which was dated 2005, I was fascinated by the relevance to the current situation. The author demonstrates how throughout history, governments have turned to the same currency devaluing schemes to try to continue to prop themselves up, ultimately leading to their inevitable downfall, and the downfall of the society they were suppose to be protecting. The same thing is happening now at a terribly alarming rate.

Money is simply a medium of exchange. Nothing more. Nothing less. The natural state of things has always led in civilized society to the use of precious metals ( hereafter referred to as PMs), specifically gold and silver, as this medium of exchange. The reasons for this are many. PMs have real value in and of themselves. They can be broken down into usable quantities (from large bullion to small coins). The amount of them available in society can not be quickly, nor infinitely increased. In short, they provide value, ease of use, and stability.

Monetary units (such as dollars) are simply known quantities of some precious metals. By definition, a dollar was the equivalent of one ounce of silver. (The British Pound Sterling was just that - a pound of sterling silver). At the time of the formation of the U. S. Constitution, gold was considered to have roughly twenty times the value of silver - hence a 'dollar' was also one twentieth an ounce of gold, or an ounce of gold was twenty dollars. That is, the value of gold or silver did not fluctuate in terms of dollars, but the value of a dollar would fluctuate if the value of gold or silver fluctuated. Things were essentially this way for the better part of 150 years. If you had a dollar, that meant you had an ounce of silver or a twentieth of an ounce of gold. If silver or gold for some reason increased or decreased in value, your purchasing power increased or decreased with it. However, due to the nature of things, rapid or large fluctations in the value of precious metals rarely occur.

In times past, such as during the late stages of the Roman Empire, governments would devalue the currency by 'clipping' the coins. That is, they would collect coins (through taxation or whatever means), shave off portions of the gold or silver, then mint new coins with the shavings. A coin that was say one ounce, may then be 0.9 ounce, but, have the same 'face value' even though the real value had diminished. Also, there were now more coins made from the same amount of PM.

Now suppose you were a Roman merchant who was selling an item for an amount equal to nine ounces of PM. Previously, you collected nine 1 ounce coins. Now, to obtain the same quantity, you needed ten 0.9 ounce coins. (Obviously, I am simplifying here). The result? There are more coins (therefore, supposedly more 'money' available for exchange) in the market, but prices have gone up. That is, the currency has been devalued. Prices have risen. People may seemingly have more 'money' in their pocket, but, their purchasing power has not improved. This is inflation.

Please note, inflation is not a rising of prices. The rising of prices is a result of inflation. Inflation is the devaluing of the currency.

Over the centuries other innovations have made this practice more convenient for the government devaluers (counterfeiters) to ply their trade. The most useful innovation has been the introduction of paper money.

Paper money began as what could be termed bank notes. Someone may not want to store their reserves of PM in their own home. Businesses which were essentially warehouses for PMs developed. One could deposit his PM in the warehouse, and the warehouse would issue him a paper receipt or receipts. Suppose I deposited 25 ounces of gold and 100 ounces of silver in the warehouse. I get receipts stating that I have this (maybe I get twenty five receipts each worth one ounce of gold, and 100 receipts each worth one ounce of silver). Now, I do not carry all this gold and silver around with me, but I can redeem any or all of my receipts whenever I desire. If I buy an item priced at one silver ounce, I could trade my receipt for it. Now, the merchant I traded with can redeem that receipt upon demand and receive the actual silver. (Likely, the warehouse (bank) would charge some type of holding and processing fee for this service.)

Now, these banks began to get creative. They determined that rarely if ever did they have a run on all deposits. At any time, they had the overwhelming majority of deposits on hand. Therefore, they began 'loaning' some of the reserves that they had. This is called Fractional Reserve Banking. So, just using my deposits for example. I may come in and out occasionally and deposit more, or withdraw some, but on the whole, my balance is staying somewhere near what I originally deposited. The bank may then write out another receipt against my deposit and give it to another individual as a loan that must be repaid. So, now for my one deposit, there are two sets of receipts in circulation. The borrower then goes and somehow invests this, trying to make a return. He may go turn his certificate over to a merchant who sells him some equipment that he uses to provide a good or service to make more money. If he makes a return, he pays back the borrowed credit, with interest. The bank has made money. As long as I, and the others who are now holding certificates against my deposits do not demand our PMs at the same time, the bank is safe. However, obviously, the larger the overlending verses the amount actually on reserve, the larger the risk the banker is taking. Also, the riskier the investment, the more risk of the bank failing.

Fractional reserve banking has caused some problems during economically troubled times in the past. In fact, it has actually caused some of the economic problems themselves. For one, this has inflated the currency (If the banker 'loans out' receipts equal to my original deposit, he has essentially doubled the currency in circulation, thereby lowering its value, much like the coin clippers of old)

During much of the 19th century, American politicians struggled with these issues. On the one hand were the bankers, licking their chops to use fractional reserve banking, along with the politicians they backed to help foster the system. On the other hand, were more economically conservative politicians who fought against this system.

Finally, in 1913, perhaps the greatest debacle in the history of American economics occured. The Federal Reserve system went into effect. Since that time, they have continued along a path that has gone further and further in the direction of currency devaluation.

The climax of this has been to utimately remove all ties from our paper money to any PM, along with the passage of 'legal tender' laws. Not too many years ago, your paper money had a noted on it saying it could be redeemed for 'real money' (i.e. silver or gold). That is no longer the case. Now, it is simply a note that we are forced by law to accept as legal tender for all debts. In reality it is nothing but a worthless piece of paper. (And nowadays, often it is not even that, but is simply an electronic blip on a computer program). You could have piles and piles of hundred dollar bills, and they are absolutely worthless in and of themselves (unlike silver or gold) and the ONLY reason they have value is because the government by law forces everyone to accept them as tender.

So, now the 'value' of a dollar is not tied to PMs. It therefore can fluctuate tremendously. As stated previously, one of the major reasons why PMs became used as a medium of exchange is because they could not be quickly and easily devalued by a sudden large influx. (It is not impossible that this could happen, as it happened in Spain when they obtained huge amounts of gold from the Americas during the 16th century - another story for another post at another time!) However, it can not easily and frequently happen.

However, when paper that is printed solely at the governments discretion and is forced to be used as legal tender is the only allowable legal tender, the government can inflate the currency at will. A huge influx of this so called money into the economy does not add one whitt of wealth to the economy, but only devalues the currency.

Our wealth as a nation is the sum total of all our productivity. In reality, money is only a medium of exchange for that productivity. If suddenly the government prints one trillion dollars and injects that into the economy, it has not increased our wealth one iota. All it has done is make the buying power of each unit (dollar) that much less. This can cause widespread destruction.

Suppose you are 70 years old, have worked hard all your life, have saved, invested, and smartly handled your money and you now have a net value of one million dollars. Sounds like a lot of money, doesn't it? However, if the government suddenly prints and circulates trillions of dollars into the economy, now your one million dollars is worth a fraction of what it once was. All your hard work and intelligence just went down the drain. This is happening to millions of Americans right now.

Well, in our current hard financial situation (which has been caused by the very monetary policies we are talking about) the Messiah's, uh, I mean the President's plan for fixing it is to inject tons of money into the economy. See how utterly senseless this is?

Not one person in a hundred understands this. The average Joe, while possibly thinking something might be amiss in what is going on, at least on some level thinks that injecting money to 'jump start' the economy is a good thing.

In actuality, it is a travesty - and one we will be suffering from for a long time to come.

This inflationary monetary policy is actually harmful in many many more ways than I can even begin to talk about here. This policy, and not the unfettered free market, causes the business 'boom and bust' cycles we have seen throughout our history. We have just come out of a long 'boom' and are now going into a huge 'bust.' The best that our current policy of stimulous can do is to continue to artifically lengthen the aritificial 'boom' and forestall the inevitable 'bust,' while making the eventual 'bust' just that much more severe. I fear we are near a breaking point where no matter what happens, soon the 'bust' will be irreversable - perhaps leading to a total cultural meltdown. The only way to fully and finally recover is to allow the 'bust' to run its course - as painful as that may be, then to restore a sound monetary policy in its wake.

Austrian economists (see the Woods link above, or that of the Mises Institute or Lew Rockwell Report to the right) have been saying this for years, only to be labeled lunatics. However, I think it is undeniable that the only solution to this situation is to somehow someway get back on some sort of Precious Metal ("honest money") monetary system with little or no government intervention.

An open letter to President Obama, and all people in power

Dear President Obama,

You may want to consider the following words from a 'Good Book' that I have:

Why do the nations rage and the peoples plot in vain? The kings of the earth set themselves, and the rulers take counsel together, against the Lord and against his anointed, saying, “Let us burst their bonds apart and cast away their cords from us.”

He who sits in the heavens laughs; the Lord holds them in derision. Then he will speak to them in his wrath, and terrify them in his fury, saying, “As for me, I have set my King on Zion, my holy hill.”

I will tell of the decree: The Lord said to me, “You are my Son; today I have begotten you. Ask of me and I will make the nations your heritage and the ends of the earth your possession. You shall break them with a rod of iron and dash them in pieces like a potter’s vessel.”

Now therefore, O kings, be wise; be warned, O rulers of the earth. Serve the Lord with fear and rejoice with trembling. Kiss the Son, lest he be angry, and you perish in the way, for his wrath is quickly kindled. Blessed are all who take refuge in him.

Thank you for your time.

Fooled Again?

A blogger friend of mine (The Sun Stands Still - linked at the right) posted the following quote from Mark Horne concerning Obama:

"Obama’s arrival is change from the Bush administration the way a baby is change from a pregnancy. He’s not a repudiation; he’s the ultimate end."

When I read that, I immediately thought of that classic hard rock anthem "Won't Get Fooled Again." by The Who. (I know - I'm kinda weird). The lyrics seem to speak of a 'revolutionary' change of power, which only results in more of the same.

Look up the lyrics on the internet - they're easy enough to find. I am sure The Who were not politically (or religiously, or in any ways) near any form of agreement with Evangelical Christianity, yet taken generically, the lyrics to this song are actually, for rock music, pretty profound.

The climactic final lines of that song demonstrate a similar thought to those of Mark Horne:

"Meet the new boss.......Same as the old boss!"

The Keynesian 'Solution'

Dictionary.com describes John Maynard Keynes as follows:

1883–1946, English economist and writer.

British economist who proposed that high unemployment, being a result of insufficient consumer spending, could be relieved by government-sponsored programs. He also advocated deficit spending by governments to stimulate ecomomic activity.

English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation

Keynesian economics has dominated the American political economy for decades, going back at least to the great depression. It was Keynesian policy which FDR used to get us out (cough, gag) of the depression. In the late 1960s early 1970s Richard Nixon (who had taken us off the gold standard completely) stated “We’re all Keynesian now.”

Virtually every president since at least FDR has been to some extent or the other, Keynesian, no matter what else you may say about him. That even includes Reagan, though possibly to a lesser extent.

As can be seen from the above definitions, one of the main, perhaps THE main tenant of Keynesian economics is that during times of economic slowdown, the government should spend money on infrastructure and various projects in order to provide jobs, spur consumer spending, etc. This, supposedly will get the economy through the tough times. Once the economy recovers, the government spending can be curtailed. It is a form of planned economy.

Sounds good on paper to the layman, but there are more than a few drawbacks.

To start with, it really does not work. As I have said elsewhere, the state of the economy was at least as bad, if not worse in the late 1930s, after years of FDR, than it was when FDR took over. FDRs programs were, among many other things, Keynesian.

It is not a natural thing for the whole economy to be in a downturn all at the same time. Unfortunately, most people think that the free market will frequently result in a total economic meltdown, at which point some government intervention (in the form, at least, of Keynesian policies, if not outright socialism) is required. However, while no possible economic system can ever insulate every individual from hardship, the free market will never end up in an economic meltdown. The meltdowns that do occur (such as 1929 onward and our current situation) are almost always directly related to government intervention. However, the solution proposed by our government leaders? More government intervention. Make sense to you??? Yeah, me neither.

1929 was the result of government intervention. The as bad or worse situation of 1938 was due to continued government intervention.

Second, it is as close to an absolute fact as anything in the world that once government spending is started, it is not stopped. Many of the programs for economic recovery of the 1930s are still with us today. This causes continued deficits and other problems which result in further economy wide problems on down the road.

Third, and most importantly, there are long term negative effects of this type of spending (deficits and higher taxes and the further economic hardships that occur due to these things). When asked about what the effects of his policy would be in the long run, Keynes himself famously quipped, “In the long run, we’re all dead.” There ya go. That’s the philosophy we want to hand down to our kids, right? We want policy which we believe (rightly or wrongly) will benefit us, but who gives a rip what it will do to our descendents? Sure, count me in. I don’t care what Jr. says.

Now, what to do about our current mess? First off, let us be clear. Our problems are not the result of the free market gone wild. Our problems are directly related to over arching government intervention into the lives and businesses of individuals and corporations, from bad, even terrible tax policy, from wretched spending programs, from freedom squelching regulations, from currency devaluing monetary policy, and on and on. The proposed solution? More government. Create money out of thin air and spend it on ‘infrastructure,’ and a myriad of other social programs. In short, the current proposed solutions are the same old tired Keynesian policies which have actually contributed to the current mess.

In the end, I have no idea exactly how all this will turn out. But I can promise you, absent any major change, the direction we are heading is wrong. We can keep putting band-aids on our severed jugulars and keep the patient alive until hopefully, in the long run, we are all dead, OR we can care about our descendents and try to fix the problems permanently with sound, honest money, low taxes, limited government, and so forth.

What do you think?

Another Freebird Falls

I heard on the way home last night, that Billy Powell, keyboardist for Lynyrd Skynyrd, passed away.

Powell's story was an interesting one. He had been classically trained as a pianist. In high school, he befriended Leon Wilkeson, future bassist for Skynyrd. Ultimately, he began working for the band as a roadie, setting up and taking down equipment, etc. No one in the band really knew that he even played an instrument, let alone that he was good.

One night in 1972 after the band had played at a prom (can you see Skynyrd playing a prom???) Billy had a few minutes and he sat down at a piano, and began playing "Freebird." Ronnie Van Zant was blown away. "Man, you mean you've been working with us for two years, and you can play like that??? We've been wanting to add a keyboardist. You're in the band."

The rest is history. Other members of the band have joked about Billy's playing. The problem is in holding him back. He does not know when to not play. he plays constantly, throughout the song. Although classically trained, Billy's work with Skynyrd produced more of a 'honky tonk' piano style.

This band (a favorite of my youth, and one that still holds a special place in my heart and mind) has had perhaps the most tragic history of any band. Everyone, of course, knows about the plane crash of October 20, 1977. That crash killed the heart and soul of Skynyrd - Ronnie Van Zant, as well as the most recent addition - Steve Gaines, who had replaced Ed King as third guitarist.

In subsequent years, guitarist Allen Collins was seriously injured (and his girlfriend killed) in an alcohol related auto accident. Collins was left permanently crippled.

In 1987, the band reunited and embarked on a reunion tour. On October 20, the ten year anniversary of the plane crash, they played the Birmingham-Jefferson Civic Center. Your's truly was present, about 15 rows back from the stage. It was a great show. Included were Gary Rossington, Powell, Leon Wilkeson, and Ed King (original 3rd Guitarist). I'm thinking Artimus Pyle may have manned the drums that night, but I am not sure. Of course Johnny replaced his brother Ronnie on vocals. A touching moment was when Allen Collins came onto the stage in his wheelchair and praised the band, and encouraged everyone to not drink and drive.

The show was great and the band has been playing with varying lineups ever since. However, most of what they have done is insignificant tripe compared to the old days.

Since that night, however, Allen Collins subsequently passed away (I think around 1990) from further complications going back to his accident. A falling out occured amongst many of the old members. Ed King was kicked out (he claims that as a Californian, he was never accepted by the other members, even in the old days - even though he is responsible for the licks on Sweet Home Alabama, their biggest hit) Artimus Pyle has had major legal battles and is no longer welcome ni the band. Many of the old timers speak ill of Rossington.

In 2001, Leon Wilkeson died of liver problems, likely related to years of not living right.

Now, Powell dies at 56. He had a history of heart problems, and was significantly overweight in later years. I am sure that he had had substance abuse issues in his life too, but I have no idea if that was a demon he had conquered or if he still dealt with it.

During the original years of Skynyrd fame (1973-1977) the band had 6 or 7 members at any one time on any one album. With some rotation, this included a total of nine people. Of these, at least five are now dead (unless there are others I am unaware of.) Of these, Powell lived the longest, and that only to 56. The only ones still living are original drummer Bob Burns, replacement drummer Pyle, Original 3rd guitarist (and sometimes bassman) Ed King, and Gary Rossington. Of the current Skynyrd recording/touring group, only Rossington is present. King has had major heart problems. Pyle has had major legal problems. I don't know much about what has happened to Burns.

I got into Skynyrd after the plane crash - probably first latching on to their music around 1980. During my high school years, all of music could be divided into two categories. There was Lynyrd Skynyrd, then there was everything else. I've grown a great deal since then, thankfully. But the original Skynyrd will always have a place in my heart. Powell was an incredible talent, and, from what I could tell seemed to be a nice, soft spoken gentleman. He will be missed and remembered fondly.

Incidently, the childhood friend/neighbor I grew up with - his birthday was October 20, the day the plane went down. Now Powell dies on January 28 - my son's 19th birthday. Weird.

Obamanomics

Maybe interesting to some of my millions of readers.

http://www.lewrockwell.com/armentano-d/armentano16.html